Financial statements

Note 49 - POST RETIREMENT BENEFITS

Description of plans

The Group operates a number of pension
and post retirement healthcare plans around
the world. Some of these plans are defined
contribution and some are defined benefit,
with assets held in separate trusts,
foundations and similar entities. Valuations
of these plans are produced and updated
annually to 31 December by qualified
actuaries. A number of defined benefit and
defined contribution plans were brought
into the Group as a result of the Alcan
acquisition in October 2007. Plans
sponsored by the Rio Tinto Alcan Packaging
business continue to be accounted for as
assets or liabilities held for sale, and are not
included in this note.

Pension plans

The majority of the Group's pension
obligations are in Canada, the UK, the US,
Australia and Switzerland, with further
notable obligations in other European
countries.

There are a number of pension
arrangements in the UK. The defined benefit
sections of these arrangements are linked to
final pay and are closed to new members,
with new employees being admitted to
defined contribution sections.

In Australia, there are two
superannuation plans providing defined
benefits linked to final pay, typically paid in
lump sum form. The main plan contains
principally defined contribution liabilities,
but is accounted for as a defined benefit
plan as it contains characteristics of both
types of plan.

A number of defined benefit pension
plans are sponsored by the US and Canadian
entities. The main plans are two Canadian
plans for salaried and bargaining employees.
Benefits for salaried staff are generally
linked to final average pay, while benefits for
bargaining employees are reviewed in
negotiation with unions.

In Europe, there are defined benefit
plans in Switzerland, the Netherlands,
Germany and France. The largest single plan
is in Switzerland and provides benefits
linked to final average pay.

The Group also operates a number of
unfunded defined benefit plans, which are
included in the figures below.

Post retirement healthcare plans

Certain subsidiaries of the Group, mainly in
the US and Canada, provide health and life
insurance benefits to retired employees and
in some cases to their beneficiaries and
covered dependants. Eligibility for cover is
dependent upon certain age and service
criteria. These arrangements are unfunded,
and are included in the figures below.

Plan assets

The proportions of the total fair value of assets in the pension plans for each asset class at the balance sheet date were:

2008

2007

Equities

52.4%

60.2%

Bonds

35.1%

29.4%

Property

7.7%

7.2%

Other

4.8%

3.2%

100.0%

100.0%

The assets of the plans are generally managed on a day-to-day basis by external specialist fund managers. These managers may invest in the
Group's securities subject to limits imposed by the relevant fiduciary committees and local legislation. The approximate total holding of Group
securities within the plans is US$6 million (2007: US$44 million).

Main assumptions (rates per annum)

The main assumptions for the valuations of the plans are set out below. Information on the sensitivity of the results to the main assumptions is included in the Financial review.

The assumptions vary by location for the 'Other' plans. Assumptions shown are for Southern Africa.

The main financial assumptions used for the
healthcare plans, which are predominantly
in the US and Canada, were: discount
rate: 6.5 per cent (2007: 6.1 per cent),
medical trend rate: 7.0 per cent reducing to
5.0 per cent by the year 2015 broadly on a
straight line basis (2007: 7.7 per cent,
reducing to 5.1 per cent by the year 2016),
claims costs based on individual company
experience.

For both the pension and healthcare
arrangements the post retirement mortality
assumptions allow for future improvements
in longevity. The mortality tables used for the
main arrangements imply that a male aged
60 at the balance sheet date has an expected
future lifetime of 24 years (2007: 24 years)
and that a man aged 60 in 2028 would have
an expected future lifetime of 26 years
(2007: 25 years).

The assumptions vary by location for the 'Other' plans. Assumptions shown are for Southern Africa.

The expected rate of return on pension plan
assets is determined as management's best
estimate of the long term returns of the
major asset classes - equities, bonds,
property and other - weighted by the actual
allocation of assets among the categories at
the measurement date. The expected rate of
return is calculated using geometric
averaging. The expected rates of return
shown have been reduced to allow for plan
expenses including, where appropriate,
taxes incurred within pension plans on
investment returns. Based on the
assumptions made and the distribution of
assets the weighted average expected return
on assets as at 1 January 2008 was 6.4 per
cent (2007: 6.9 per cent) and is expected to
be 5.9 per cent as at 1 January 2009.

The sources used to determine
management's best estimate of long term
returns are numerous and include countryspecific
bond yields, which may be derived
from the market using local bond indices or
by analysis of the local bond market, and
country-specific inflation and investment
market expectations derived from market
data and analysts' or governments'
expectations as applicable.

Total expense recognised in the income statement before tax

Pension benefits

Other benefits

2008
Total
US$m

2007
Total
US$m

Current employer service cost for Defined Benefits ("DB") plans

(265)

(19)

(284)

(145)

Current employer service cost for Defined Contribution benefits within DB plans

(133)

-

(133)

(106)

Current employer service cost for Defined Contribution plans

(62)

-

(62)

(40)

Interest cost

(963)

(62)

(1,025)

(516)

Expected return on assets

1,000

-

1,000

550

Past service cost

(8)

5

(3)

17

Gains on curtailment and settlement

3

2

5

-

Total expense

(428)

(74)

(502)

(240)

The above expense is included as an employee cost within net operating costs.

Total amount recognised in the Statement of Recognised Income and Expense before tax

2008
US$m

2007
US$m

Actuarial (loss)/gain

(1,666)

141

Gain on currency translation on plans using US dollar functional currency

321

-

Loss on application of asset limit

26

-

Total (loss)/gain recognised in the Statement of Recognised Income and Expense

The surplus amounts shown above are included in the balance sheet as Trade and Other Receivables. See note 17. Deficits are shown in the balance sheet as Post Retirement benefits. See note 27.

Contributions to plans

Contributions to pension plans totalled
US$615 million (2007: US$246 million).
These contributions include US$52 million
(2007: US$30 million) for plans providing
purely defined contribution benefits
(including 401k plans in the US) and US$10
million (2007: US$10 million) to industrywide
or multi-employer plans; these are
charged against profits and are included in
the figures for "current employer service
cost" shown above.

Contributions for other benefits totalled
US$53 million (2007: US$30 million).

Contributions to pension plans for 2009
are estimated to be around US$150 million
higher than for 2008. Healthcare plans are
unfunded and contributions for future years
will be equal to benefit payments and
therefore cannot be predetermined.

Movements in the present value of the
defined benefit obligation and in
the fair value of assets

The amounts shown below include, where
appropriate, 100 per cent of the costs,
contributions, gains and losses in respect of
employees who participate in the plans and
who are employed in operations that are
proportionally consolidated or equity
accounted. Consequently, the costs,
contributions, gains and losses do not
correspond directly to the amounts disclosed
above in respect of the Group. Pure defined
contribution plans and industry-wide plans
are excluded from the movements below.

Pensionbenefits

Otherbenefits

2008
Total
US$m

2007
Total
US$m

Change in present value of obligation:

Present value of obligation at start of the year

(17,624)

(1,087)

(18,711)

(6,444)

Current employer service cost

(423)

(19)

(442)

(272)

Interest cost

(963)

(62)

(1,025)

(516)

Contributions by plan participants

(253)

-

(253)

(190)

Experience gain/(loss)

554

11

565

(62)

Changes in actuarial assumptions gain

1,583

101

1,684

315

Benefits paid

1,097

53

1,150

572

Alcan acquisition (restated)

-

-

-

(11,654)

Inclusion of arrangements

(3)

-

(3)

-

Past service cost

(7)

15

8

22

Curtailment gains

4

2

6

-

Settlement gains

28

-

28

-

Currency exchange rate gain/(loss)

2,873

93

2,966

(482)

Present value of obligation at end of the year

(13,134)

(893)

(14,027)

(18,711)

Gains and losses on obligations

2008

2007

2006

2005

2004

Experience gains and (losses): (i.e. variances between the estimate of obligations and the
subsequent outcome)

Gain/(loss) (US$m)

565

(62)

(89)

139

(148)

As a percentage of the present value of the year end obligations

4%

0%

-1%

2%

-3%

Change in assumptions gain/(loss) (US$ million)

1,684

315

124

(180)

(429)

Pensionbenefits

Otherbenefits

2008
Total
US$m

2007
Total
US$m

Change in plan assets:

Fair value of plan assets at the start of the year

16,150

-

16,150

6,031

Expected return on plan assets

1,000

-

1,000

550

Actuarial loss on plan assets

(3,910)

-

(3,910)

(108)

Contributions by plan participants

253

-

253

190

Contributions by employer

586

53

639

263

Benefits paid

(1,097)

(53)

(1,150)

(572)

Alcan acquisition (restated)

-

-

-

9,380

Inclusion of arrangements

8

-

8

-

Settlement losses

(29)

-

(29)

-

Currency exchange rate loss/(gain)

(2,456)

-

(2,456)

416

Fair value of plan assets at the end of the year

10,505

-

10,505

16,150

Actual return on plan assets

(2,910)

442

2008

2007

2006

2005

2004

Difference between the expected and actual return on plan assets:

(Loss)/gain (US$m)

(3,910)

(108)

338

223

387

As a percentage of year end plan assets

-37%

-1%

6%

4%

8%

Post-retirement healthcare - sensitivity to changes in assumptions

An increase of one per cent in the assumed
medical cost trend rates would increase the
aggregate of the current service cost and
interest cost components of the postretirement
healthcare expense by
US$8 million (2007: US$5 million), and
increase the benefit obligation for
these plans by US$85 million (2007:
US$89 million). A decrease of one per cent
in the assumed medical cost trend rates
would decrease the aggregate of the current
service cost and interest cost components of
the post-retirement healthcare expense by
US$7 million (2007: US$5 million), and
decrease the benefit obligation for these plans
by US$75 million (2007: US$77 million).